Category

Industrials Sector

Brief Industrials: Mobile World Investment Corporation: Discount to Other Consumer Stocks Is Asymmetric and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Mobile World Investment Corporation: Discount to Other Consumer Stocks Is Asymmetric

1. Mobile World Investment Corporation: Discount to Other Consumer Stocks Is Asymmetric

My previous insight Top Consumer Themes in Vietnam noted some of the top consumer themes in Vietnam and how Phu Nhuan Jewelry Jsc (PNJ VN) and Mobile World Investment (MWG VN) stood out.  MWG is a stand out in the consumer space because of the following: 1) strong initiatives from management to seek new sources of growth, 2 ) historical favorable financial performance and 3) its current discount to consumer stocks and even the VN Index ( ex. premium for buying shares).  MWG”s financial growth has been outpacing many of its consumer peers in recent years, while other consumer stocks have begun to see single digit growth rates.

Consistent Financial Performance: MWG was able to surpass its growth target for 2018 and this marked the fifth consecutive year that MWG achieved its annual target.  Its 2018 revenue rose by 30.4%, which was driven by the strong growth of its consumer electronics products. MWG is positioned to continue delivering favorable growth ( above 20%) in the coming years and to improve margins as Baxhoaxanh’s operations become more mature.

Finding new sources of growth: The company is positioned to withstand the relative slowdown of the consumer electronics segment through company specific developments, while the favorable macro picture in Vietnam is also supportive of strong financial growth.  As traditional sources of growth begin to become exhausted, MWG can find new growth driven by the expansion of its Dien May Xanh stores and its new grocery stores ( Bax Hoa Xanh).

Moats are lame: MWG has been seeking new sources of growth rather than relying merely on its favorable market share and the high growth rates of various sectors in Vietnam.  Several consumer stocks that were less aggressive in this manner have seen single digit top-line growth in recent years.  Stocks in Vietnam are likely to face increasingly saturated markets in the future and innovation will be the key for companies to outperform during the 2020s-2030s ( not to mention the fact that Vietnam’s circa 30% discount to emerging Asia no longer exists).

It is imperative to note that MWG trades at a notable discount to other consumer stocks in Vietnam despite the company’s consistent financial performance and management’s initiative to identify new sources of growth.  The market appears to be undervaluing this unique initiative/ability from management and focusing more on the short term transitions taking place.

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Brief Industrials: CloudMinds IPO Initiation: Computer Says No and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. CloudMinds IPO Initiation: Computer Says No
  2. Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIA Engineering
  3. Yaskawa: Poor 1Q Should Correct Expectations and Share Price But Start Searching for an Entry Point
  4. HIS Hostile Tender for Unizo – Fun Ahead!
  5. Dalian Port – Rearranging The Deck Chairs

1. CloudMinds IPO Initiation: Computer Says No

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CloudMinds (CMDS US) offers an end-to-end cloud robot system which is capable of operating consumer service robots, which include both in-house and third-party robots. It is backed by Softbank Group (9984 JP)’s Vision Fund, which is a 34.6% shareholder.

CloudMinds is big on vision and buzzword-laden rhetoric. Overall, we believe that CloudMinds is not an IPO for the faint-hearted, and it is not yet ready for the unforgiving glare of the public markets.

2. Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIA Engineering

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Last Week in Event SPACE …

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

EVENTS

Chiyoda Corp (6366 JP)  (Mkt Cap: $729mn; Liquidity: $15mn)

Travis Lundy calculated the total shares to be sold at 48-50m accounting for 20% of outstanding and 30% of float in Chiyoda’s upcoming removal from the Nikkei (and now confirmed – see Travis insight below) and Topix indexes, and referenced the exclusion trades resulted in Toshiba Corp (6502 JP) falling 24% and Sharp Corp (6753 JP) falling 31%. But Mio Kato, CFA feels that the company’s situation could skew the timing compared to what would be “normal”.

  • Mio believes that it may be more interesting to look for a reversion trade in the event that the stock price declines significantly into the exclusion. He feels that the fall may not be quite as steep as that for Toshiba or Sharp. In both Toshiba and Sharp’s cases there was still significant uncertainty surrounding the names as Toshiba had not completed or even announced its capital raise at the time and the sale of its memory subsidiary was still being hotly contested; while in Sharp’s case Hon Hai was playing hardball on deal terms.
  • In contrast, Chiyoda has already secured funding from a very stable and large partner and appears to have kitchen-sinked a lot of assumptions and faces a very bright operational outlook – its problems stem from poor risk management, which Mitsubishi is meant to solve, and not operations. 
  • In addition, due to Chiyoda’s previous operational struggles and write-downs there is already a very significant short base. This could distort the usual timing of the fall in the stock price and the fact that the stock has recovered to just 3.5% below the level prior to more widespread reporting of the exclusion points to this eventuality. It does seem likely that the size of the required sell could push Chiyoda’s price down at some point – Mio argues this could happen much closer to the actual event than usual. If borrow is difficult to come by, there could be money to be made on the other side around the turn of the month.

(link to Mio’s insight: Chiyoda: Risks to the Index Kick-Out Trade and Potential Volatility at Earnings the Next Day)


Bandai Namco Holdings (7832 JP)  (Mkt Cap: $12.6bn; Liquidity: $28mn)

The Nikkei Inc announced its “Changes to the Nikkei Indices” this week  which became inevitable when the Tokyo Stock Exchange announced on the 28th of June that Chiyoda Corp (6366 JP)s yuho (Annual Securities Report) had the company at a negative net worth, requiring a reassignment to the Second Section of the TSE. Nikkei 225 Methodology requires that members be TSE-1 listed. The Announcement surprised people. As expected, Chiyoda is Out – but Bandai is In.  Chiyoda closed down 2.6% on 2mm shares, and Bandai closed limit up +19.3% on 300k shares allocated at the limit on the close.

  • There are still something like 50 million shares of Chiyoda to sell. The significant shorts – which are likely well in excess of the 23+ million shares shown and reported – are likely sourcing a lot of their borrow from the shareholders (passive funds) who have to sell. Those shareholders will have to recall their borrow. Earnings come out the day after the exclusion. I would not want to be short that earnings number. Plus read Mio’s insight above.
  • There should be 27mm shares to buy in Bandai which is about 20% of float. However, if only half the foreigners and only half the individual holders would be willing to sell on a large jump in price in the next few weeks, then the net available to sell is probably closer to 80mm shares and 27mm to buy would be one-third. It’s a lot. Once it gets purchased by Nikkei 225 funds, it won’t come out anytime soon. This stock is likely to get squeezed.
  • Dmg Mori Co Ltd (6141 JP) was flagged by many as a good bet to replace Chiyoda. Since then, roughly 14 million shares of excess volume have traded. If half of that is a real displacement of holdings based on this event, 7mm shares would need to be sold. That is 3% of shares out and 4-5% of float. It is among the larger excess positioning situations in the last five years in the stock. DMG closed -10% on 7.3mm shares in response to the index changes.

(link to Travis’s insight: Nikkei 225 – Bandai Namco IN, Chiyoda OUT)


Kcc Corp (002380 KS)  (Mkt Cap: $2.2bn; Liquidity: $6mn)

KCC will split itself into two companies in the form of an equity spinoff with KCC the surviving company and KCG the new company. KCC will mainly comprise the B2B business (silicone, paint and varnish); KCG will get the B2C business such as glass and interior. An EGM will be held on Nov 13 and shareholder approval can be obtained with 2/3 of attending votes and 1/3 of shares out. Both companies will be listed – KCC on Jan 21 next year, but KCG’s listing date hasn’t been fixed.

  • Typically, demergers serve to streamline a business.  However, the major shareholder retains 40%, which Sanghyun Park considers to be weak. He believes the major shareholder intends to further solidify this controlling stake via a tender, possibly a month after the Jan 21 listing. 

(link to Sanghyun’s insight: KCC Corp Equity Spinoff: Summary & Mispricing Checkup)


R* Shares CPSE ETF (CPSEBE IN) 

The ETF is based on the Nifty CPSE index and currently includes 11 listed Central Public Sector Enterprises, declining to 10 after Rural Electrification (RECL IN) was kicked out this past Friday. The sixth tranche of the ETF is expected to open on July 18 to anchor investors and on July 19 to non-anchor investors. The new units are expected to start trading on July 29. The discount on the ETF will be 3%, opening up arbitrage opportunities to investors.

  • The CPSE ETF does not trade big volumes on a regular day. However, there is a huge volume surge following fund offerings as many investors look to flip their allocation back into the market and lock in a profit. The anchor portion was oversubscribed almost 6 times in the last tranche issued in March this year, though the number may be smaller this time with the tighter discount being offered.
  • The ETF will need to buy around 63m shares of Indian Oil Corp (IOCL IN) in the market on July 19. Brian Freitas estimates this number since the Government of India can only sell around 64m shares to the ETF as this will take their stake in the company down to 51.5%, the lowest percentage for the stock to remain in the Nifty CPSE index. Given the stock trades around 13m shares a day on average, he sees 4x of excess volume and expect the stock to rally in the lead up to July 19 and see buying over the day on July 19.

links to Brian’s insights:
The CPSE ETF Arb Is Back, but Tighter!
India – NIFTY CPSE Index Review.

M&A – ASIA-PAC

Unizo Holdings (3258 JP) (Mkt Cap: $913mn; Liquidity: $4mn)

Japan’s premier discount travel agency H I S Co Ltd (9603 JP) on Wednesday announced it would launch a Partial Tender Offer (commencing this past Friday) to purchase a 40+% stake in real estate and hotel business Unizo to raise its stake from ~4.8% to 45.0%. The Tender Offer price is at a 56% premium to the last trade and is at an 18-month high. But, this is a hostile tender.

  • A hostile tender offer by one company upon another conducted without warning, or with warning but without approval, is reasonably rare. In Japan, it is even rarer. This is, however, the second in six months – the first being Itochu Corp (8001 JP)‘s tender offer for shares of Descente Ltd (8114 JP).  HIS has decided to buy 40% of a company it hadn’t talked to. At a 50+% premium. And given this one has hostility AND a longer end date, there is more trading and event optionality than normal.
  • Unizo has several possible responses it could give. The right thing to do would be to establish an independent committee immediately. A rights offering might kill the deal. But it would be fair to investors. A White Knight is not unthinkable. Travis expects the odds are pretty good that Unizo does not have a great defense here. That means the Tender likely goes through.
  • Unless corporate and financial cross-holders tender, the pro-ration could end up being very high.  If crossholders tender, pro-ration goes way down and one is better off just selling everything in the market for a small loss. Travis is bullish that the tender goes through and bullish the profit opportunity. He thinks for the astute arbitrageur, there is a lot of room to play around the ranges here.

(link to Travis’s insight: HIS Hostile Tender for Unizo – Fun Ahead!)


Villa World Ltd (VLW AU)  (Mkt Cap: $203mn; Liquidity: $1mn)

VLW and AVID have (finally) entered into a Scheme Implementation Agreement at A$2.345/share yesterday, which is a 17.8% premium to the unaffected price of $1.99 on 14 March, and an A$0.115 bump over the initial pitch in March. Any final or special dividend paid on or prior to the implementation of the Scheme will reduce the Offer Price. The key nagging issue is Ho Bee Land Ltd (HOBEE SP).

  • Ho Bee, VLW’s largest shareholder and JV partner, responded to AVID’s proposal by buying 2.2mn shares (~1.8% of shares out) at an average of A$2.04/share – and a high of A$2.18/share – lifting its stake to 9.41% on the same day as the initial Offer. Ho Bee further bumped its stake to 10.45% on the 25 March at an average price of A$2.21; and finally, to 11.62% on the 15 April at an average of $2.17. Its overall average in-price is A$1.98/share.
  • Would Ho Bee go to such extreme just to extract another 5% from the Offer? Maybe, but it is a little weird. Ho Bee did not buy over $2.23/share.
  • On balance, this deal should get up. Pricing appears fair with respect to peers. Ho Bee receives a decent premium to its overall average position. This is also not a material holding for Ho Bee – the 11.62% stake is equivalent to ~2% of its market cap – while it remains directly invested in the Melbourne JV.  With a late November/ early December completion, this is trading very tight to terms at 0.6% gross.

(link to my insight: Villa World Greenlights AVID’s Offer)


Ascendas Hospitality Trust (ASCHT SP) (Mkt Cap: $844mn; Liquidity: $3mn)

On 3 July, Ascott Residence Trust (ART SP) and ASCHT jointly announced a proposed combination, which would result in the combined entity becoming the largest hospitality trust in the Asia Pacific region, one of the top ten globally, with an asset value of S$7.6bn. It would – using data from the end of June – become the 7th largest trust on the SGX.

  • The deal is for Ascott to acquire ASCHT through a Scheme of Arrangement whereby ASCHT unitholders will receive what was – at the announcement – S$1.0868 per ASCHT Stapled Unit. The exact terms are S$0.0543 in cash and 0.7942 Ascott Reit-BT Stapled Units. That is a ratio of 0.836 but if you do the arithmetic, it comes out as a NAV-flat transaction. Neither ASCHT nor ART shareholders “overly benefit” at the expense of the other, but they both benefit from scale lowering future costs.
  • The deal is another REIT consolidation to create a LARGER NewREIT. It was also totally obvious, after the Ascendas-Singbridge deal was signed earlier this year, that within the Capitaland group (which meant Temasek was going to own 51% of Capitaland when completed), this was going to happen (even though the deal meant there were no chained transactions for the REITs). It makes one wonder if there is a deal for Ascendas Real Estate Investment Trust (AREIT SP) to come. 
  • The deal (at the time of the insight) showed a 4.5% spread being long ASCHT and short Ascott, which is slightly wide for a deal of ~five months. However, there is some uncertainty in the distributions. If you own Ascott and are in a position to switch out of Ascott into AREIT, Travis would do so. If you own ASCHT and you like the risk of owning the REIT, you own the right one. 

(link to Travis’s insight: Ascott & Ascendas Hospitality Merger – Not Unexpected and Should Be Easy)


Dalian Port (Pda) Co Ltd H (2880 HK)  (Mkt Cap: $3bn; Liquidity: $1mn)

Back on the 4 June, Dalian Port (Pda) announced a possible Mandatory General Offer (MGO) at $1.0127/share, a 0.27% premium to last close. The MGO would be triggered following the rearrangement of various companies under the PRC government, collectively holding 68.37% into Dalian Port (Pda), with the long-term objective of merging the ports in Liaoning province under a single platform. The shareholding structure is a spider’s web and understanding the share transfers is probably best done by studying the diagrams in the document and the insight.

  • The integration/consolidation process is complicated with local, provincial and central government holdings in port ownership. Further, local governments, which often trumpet their success in tandem with the performance of its port, may be less willing to forego such economic benefits by giving up absolute control.
  • China Merchant Holdings already has effective control of Dalian Port (Pda) – (47.31%) direct and 21.05% via Team Able/China Merchants Port (144 HK). The equity transfers forming part of the restructuring are being hived out from one SASAC entity into another SASAC-controlled entity. This should all go through and the unconditional MGO will be triggered, and potentially wrap up in October, provided the ETA completes on the long stop date.
  • Dalian Port (Pda) is trading in line with listed Hong Kong ports. You have a (likely) hard floor at $1.01, with expectations of further group restructuring, as the three Liaoning ports are integrated. However, HK port companies are down ~7.% in the past year, similar to Chinese-listed port companies.  The sentiment is decidedly downbeat as the trade war creates a less profitable business environment.

(link to my insight: Dalian Port – Rearranging The Deck Chairs)


Health Management Intl (HMI SP) (Mkt Cap: $844mn; Liquidity: $3mn)

The previous Friday, listed regional (Singapore, Malaysia, Indonesia) private healthcare provider HMI announced an Implementation Agreement for a privatisation by way of Scheme of Arrangement whereby private equity fund EQT would acquire HMI for S$0.73/share in cash or one share of the Acquirer. That price is a 25-30% premium to the 1, 3, 6, and 12-month VWAPs prior to the announcement and a 14% premium to the last “undisturbed” trading day.

  • It is not overly generous. The premium is small, and the forecast Next 12 Month EV/EBITDA multiple at 17+x is OK but compared to the other private hospital operators out there in Asia it is not overwhelmingly high-priced. It seems a bit of a stretch to see someone come over the top when this has been negotiated. However, if one asked me whether the likelihood of bump or deal failure is more likely, Travis would tilt towards bump, but it would be just a kiss.
  • It takes 75% of the 39% not owned by NSI and “concert parties” to get this done, but the 2018 Annual Report showed that 89.75% of the shareholders (i.e. 83.2% or so of the possible Scheme Shareholders) owned more than 1,000,000 shares. The top 40 shareholders determine the outcome of this deal as long as the rest generally are split 51/49 or better. It is difficult to see this one getting knocked down.
  • Travis expects the timeline of this deal is about 4 months plus perhaps a week. That means at S$0.72 the gross spread at 1.39% gets you an annualised spread of about 4.15%. At S$0.715, the gross spread is 2.10% (before comms, etc) so 4 months is 6+% annualised.  The trade here is to get queue priority at S$0.715. 

(link to Travis’s insight: Health Management Int’l Privatisation – Easy Peasy)


Briefly …

Harbin Electric Co Ltd H (1133 HK) this week announced there will be no further extension of its Offer which closes on the 19 July. By my estimate, tendered shares total 71.86%. The tendering condition is 90%.

M&A – UK

Telford Homes (TEF LN) (Mkt Cap: $335mn; Liquidity: $1mn)

On July 3rd, US-based commercial real estate services company, CBRE Group Inc A (CBG US)announced that they had reached an agreement with the board of London-based residential real estate developer, Telford, to acquire 100% of its shares by way of a Scheme of Arrangement at a price of GBP3.50/ share. The offer values the target at a market cap of GBP 265mn. 

  • While the Offer Price translates to premia of 11.1%, 14.3%, and 21.3% to the undisturbed price, 1-month VWAP and 3-month VWAP respectively, it remains 3.4% lower than the 1-year VWAP of Telford shares. Furthermore, the offer price also translates to discounts of 28.8% and 38.8% to the stock’s 1-year and 2-year highs respectively.
  • The company appears to have confidence its current build-plan and will come through on budget and so after a couple of project delays at the end of this past year, earnings will rebound and march higher. The few analysts who cover the stock are less bullish this year, but it appears they expect the company to meet its 2020 targets a year or two later. 8x EPS and 1.0x book seem quite low. It is below the mean of the selected comps.
  •  If Travis had to bet right now, it’s 50/50 it does not get done. Brexit worries could get this over the line but he expects there are some unhappy shareholders. He is not sure there is enough time to get a competitor in there to see the price lifted.  The deal timeline is very short. The indicative timeline suggests the Target Scheme Meeting could be in just four weeks. 

(link to Travis’s insight: Telford Homes Takeout – A Disappointing End?)

M&A – US

Avon Products (AVP US) (Mkt Cap: $1.8bn; Liquidity: $41mn)

On May 22, 2019, Avon announced that it had entered into a merger agreement to be acquired in an all-stock transaction by Brazilian Holding Company Natura & Co (NATUR3 BZ).  Natura will exchange 0.30 of its shares for each AVP share on a fixed exchange ratio basis, currently valuing AVP at ~US$2 bn. The merger agreement deadline is set for July 22, 2020. On completion of the merger, NATU3 shareholders will own 76% of the combination with AVP shareholders owning 24%. The transaction catapults NATU3 to becoming the world’s sixth largest consumer goods company.

  • Natura is paying ~10x consensus 2019 EBITDA for standalone AVP which is reasonable in comparison to prevailing peer group multiples averaging 17x and compares with Natura’s own standalone valuation multiple of ~14x.
  • The transaction could attract particular scrutiny from the antitrust authorities in Brazil, which represents the single largest market for both Natura and AVP. According to data from Euromonitor, Natura maintains a commanding lead in Brazil’s direct sales market for cosmetics with an estimated 31% market share followed by a ~ 16% share for AVP. That being said, the direct sales market is based around independent consultants/reps, many of whom already offer both Natura and Avon products in Brazil. 
  • The double-digits merger spread that prevails (14% at the time of the insight) could offer a lucrative opportunity for arbs. The complicating factor is that Natura is listed on the Brazilian Stock exchange (B3) and denominated in an historically volatile currency, the Brazilian Real, while AVP shares trade on the NYSE in US$. As some AVP shareholders may not want to own or are restricted from owning shares that trade on a non-US exchange, Natura will offer AVP shareholders the option to receive Natura shares in the form of Level-II ADRs to be traded on the NYSE or shares listed on B3. Natura does not currently have an ADR in issue.

(link to Robert Sassoon‘s insight: MergerTalk: Natura & Co/Avon Products -“Ding Dong, The Avon Spread Calling”)

STUBBS/HOLDCOS

Singapore Airlines (SIA SP) / Sia Engineering (SIE SP) 

SIE gained 15% the previous week, rekindling privatisation talks by SIA.  Despite the share price increase, SIE trades around November 2009 levels. SIE is not aware of any reasons for the jump. The stub is not terribly exciting with SIE accounting for 18% and 22% of NAV and market cap, and barely makes the grade with SIE trading ~US$1mn/day.

  • Last year’s privatisation of HAECO (44 HK) at $72/share (63.2% premium to last close) by Swire Pacific Ltd Cl A (19 HK) – which held 74.9% prior to the Offer – is not lost on investors. The takeover PER was 35x vs. 19x currently for SIE. Peer comps trade at 24x. SIE only appears fairly valued on an EV/EBITDA metric on account of the earnings from associated companies and JVs.
  • SIE is a maintenance, repair & overhaul company providing aircraft & component overhaul, fleet management and line maintenance services. The company also has material stakes in associated companies and JVs which contribute 71% of the Group’s profits in FY19, up from 58% in FY18.
  • The outcome, should an Offer be pitched, would cost SIA ~S$700mn to take out the shares it does not own. Not chump change, and it might have a slightly negative impact on SIA as it removes one layer of transparency. But given the stub weakness, the focus would be on the SIE arbitrage. I would not want to be short SIE here.

(link to my insight: StubWorld: Just Rumours (For Now) As SIA Engineering Pops)

SHARE CLASSIFICATIONS

My share class monitor provides a snapshot of the premium/discounts for 322 share classifications –  ADRs, Korean prefs, dual class, Thai (F/L) & A/Hs – around the region.

(link to my insight: Share Classifications: A Year In Review)

OTHER M&A UPDATES

CCASS

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges – like Madison Holdings Group Ltd (8057 HK) on the 5 July.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

Name

% chg

Into

Out of

ISP Global (8487 HK)
50.50%
Bluemont
Outside CCASS
Camsing (2662 HK)
Great Roc
Founder
18.20%
Kingston
Citi
Source: HKEx

3. Yaskawa: Poor 1Q Should Correct Expectations and Share Price But Start Searching for an Entry Point

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Yaskawa Electric (6506 JP) reported 1Q earnings today, kicking off the season for the factory automation space in rather dour fashion with revenue down 16.2% YoY and OP down 58.2% YoY. Revenue was ¥107.4bn, 10% below consensus and we estimate about 4-5% below the company’s own plan, while OP was ¥7.2bn, about 30% below consensus.

The results look rather dire and are likely to pour cold water on hopes for a quick rebound for the sector. We are turning more constructive on the name but are increasingly concerned for peer Harmonic Drive Systems (6324 JP). We discuss the details below.

4. HIS Hostile Tender for Unizo – Fun Ahead!

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Another Hostile Deal!!!

Japan’s premier discount travel agency H I S Co Ltd (9603 JP) on Wednesday announced it would launch a Partial Tender Offer to purchase a 40+% stake in real estate and hotel business Unizo Holdings (3258 JP) to raise its stake from ~4.8% to 45.05%. The Tender Offer was launched this morning (EDINET disclosure only in Japanese). The Tender Offer price is at a 56% premium to the last trade and is at an 18-month high.

The announcement was made at around 1:30pm local time, and the shares jumped 20% to limit up ¥2390 in a five minute period, trading 700,000 shares, which was about three and a half days volume on average – before getting pegged at limit up (the shares went limit up yesterday too, closing at ¥2890 on close allocation volume of 220,000+ shares. 

source: tradingview.com

Quite late that evening, Unizo Holdings issued a release saying…

The new Takeover Rules enacted in December 2006 (with one amendment to the SEL made in 2005 in direct reaction to the loophole used by Livedoor to acquire large stakes of Nippon Broadcasting System off-market to reach a level above one-third) are enshrined in the Financial Instruments and Exchange Act/Law (normally called “FIE”, “FIEA”, or “FIEL”), with the most relevant portions commencing with Article 27-2. These “TOB Rules” outlawed stealth acquisition off-market to “suddenly acquire” a large stake without passing through the market mechanism or conducting a Tender Offer. The principle of this was a sense of “fairness” such that minority investors had an equal opportunity to sell to someone who sought to have control or influence, and that it could not simply be arranged through collusive behavior. 

That’s why HIS is conducting a Tender Offer.

The first rule which matters here for Unizo Holdings (3258 JP) is that the Board of the “Subject Company”, according to Article 27-10…

shall, pursuant to the provisions of a Cabinet Office Ordinance, submit a document which states its opinion on the Tender Offer and other matters specified by a Cabinet Office Ordinance (hereinafter referred to as the “Subject Company’s Position Statement”) to the Prime Minister within a period specified by a Cabinet Order from the date when the Public Notice for Commencing Tender Offer is made.

That period specified is 10 business days, so Unizo has until 25 July.

A Rare Hostile Tender Offer

A hostile tender offer by one company upon another conducted without warning, or with warning but without approval, is reasonably rare. In Japan it is even rarer. This is, however, the second in six months, the first being Itochu Corp (8001 JP)‘s tender offer for shares of Descente Ltd (8114 JP). That situation was much discussed on these pages by Michael Causton and myself, and eight insights spanning months on the situation are to be found here

The Descente Tender Offer was to get Itochu from 30% to 40% after Itochu, which had been in business with Descente for 50 years, and had held 25% for decades, was not consulted on a business tie up with Wacoal, negotiated in a hurry last year, designed to sideline Itochu’s influence.

That was a news story and a half for 10% of a company. This time HIS analyzed the company, liked what it saw, bought 4.8%, and says it asked to meet. Unizo wouldn’t. Repeatedly.

So HIS decided to buy 40% of a company it hadn’t talked to. At a 50+% premium.

This promises to be interesting. And given this one has hostility AND a longer end date, there is more trading and event optionality than normal. That optionality is discussed below, and as is normal, we have Arb Grids.

The shares have traded for 5 minutes in the market and one closing allocation, and have traded 2.7% of shares out in that space with the stock now up 45% since 1:30pm Weds. This morning the shares will open and we will see what happens.


This situation is going to have hair and we love those. 

This is a $400mm Tender Offer.

It is WELL worth your time to study it if you are an arbitrageur. 

If you are a long-only investor holding the stock, it is a complicated situation which may warrant a deeper look into things you do not normally delve. Do not hesitate to get in touch.


For other insights on Japanese M&A please check the list of Japan-related Event-Driven insights here. As a reference to Japan M&A rules and practices, please see the Quiddity Japan M&A Guide 2019.

5. Dalian Port – Rearranging The Deck Chairs

Final

Back on the 4 June, Dalian Port (Pda) Co Ltd H (2880 HK) announced a possible Mandatory General Offer (MGO) at $1.0127/share, a 0.27% premium to last close. 

The MGO would be triggered following the rearrangement of various companies under the PRC government, collectively holding 68.37% into Dalian Port (Pda), with the long-term objective of merging the ports in Liaoning province under a single platform.

Dalian Port Corporation (PDA) currently holds 46.8% – via A and H shares – into Dalian Port (Pda). PDA, in turn, is a 100%-held subsidiary of Liaoning Port Group, which in turn is held as to 50.1% by the Liaoning Provincial Government (LPG) (through Liaoning SASAC) and 49.9% by China Merchants Liaoning (CML). 

This % holding into Liaoning Port Group was formulated in a restructuring last November.

LPG intends transferring (deemed the Equity Transfer, or ETA) 1.1% of its stake to CML, giving CML 51% (& effective control) of Liaoning Port Group. 

LPG will then transfer 36.34% and 2.66% of its equity interest in Liaoning Port Group to Dalian SASAC and Yingkou SASAC respectively for nil consideration. Perusing the shareholder charts helps crystalize the process.

The transfer is subject to a number of conditions, but presumably will be rubber-stamped. The long stop date for the conditions is 30 September. 

The new news is that the transfer agreement in respect of the Dalian SASAC equity transfer was executed on 17 June 2019  – it is not clear why Dalian Port (Pda) chose to make this announcement over three weeks after it was completed.

The ETA remains subject to a number of outstanding conditions.

From an arb perspective, there isn’t much skin in the game, but that is deliberate. The intention is to maintain Dalian Port (Pda)’s listing and therefore the low-ball Offer premium. But the development of this integrated port platform is interesting.

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Brief Industrials: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms

1. MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms

Utx3

Reaction to the proposed ‘merger of equals’ between aerospace giant United Technologies (UTX US) and US defense  contractor Raytheon Company (RTN US) announced at the beginning iof the week, has so far been met with an underwhelming reaction by the market.  While the strategic rationale for the deal sounds reasonable to us (although we acknowledge that our viewpoint is not universally accepted). Nor do we have any qualms about the terms of the offer.  So what is the issue here?

We believe the major complicating factor in this situation is that United Technologies is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price. This has significant ramifications for an all-stock deal in which the substantially undervalued United Technologies stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which we assess should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected. Below, we offer a detailed assessment of how we arrive at this conclusion.  

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Brief Industrials: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms
  2. Extreme Valuations: Global Stock Ideas Using the BORUC Yield

1. MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms

Utx3

Reaction to the proposed ‘merger of equals’ between aerospace giant United Technologies (UTX US) and US defense  contractor Raytheon Company (RTN US) announced at the beginning iof the week, has so far been met with an underwhelming reaction by the market.  While the strategic rationale for the deal sounds reasonable to us (although we acknowledge that our viewpoint is not universally accepted). Nor do we have any qualms about the terms of the offer.  So what is the issue here?

We believe the major complicating factor in this situation is that United Technologies is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price. This has significant ramifications for an all-stock deal in which the substantially undervalued United Technologies stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which we assess should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected. Below, we offer a detailed assessment of how we arrive at this conclusion.  

2. Extreme Valuations: Global Stock Ideas Using the BORUC Yield

The Bucephalus Idea Generator (BIG) picks stocks by combining our work on Creative Accounting and our work on capex and valuation cycles to see which companies are forecast to generate extreme returns and/or are on extreme valuations. The model then creates performance outcomes to search for absolute and relative investment ideas.

We run the model every month to see what has changed and which companies are worthy of further investigation.

Click here to download a sample company overview from the Bucephalus Idea Generator.

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Brief Industrials: Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIE Engineering and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIE Engineering
  2. Yaskawa: Poor 1Q Should Correct Expectations and Share Price But Start Searching for an Entry Point
  3. HIS Hostile Tender for Unizo – Fun Ahead!
  4. Dalian Port – Rearranging The Deck Chairs
  5. KCC Corp Equity Spinoff: Summary & Mispricing Checkup

1. Last Week in Event SPACE: Chiyoda, Bandai, Unizo, Ascendas, Villa World, Avon, SIE Engineering

13%20jul%202019

Last Week in Event SPACE …

(This insight covers specific insights & comments involving Stubs, Pairs, Arbitrage, share Classification and Events – or SPACE – in the past week)

EVENTS

Chiyoda Corp (6366 JP)  (Mkt Cap: $729mn; Liquidity: $15mn)

Travis Lundy calculated the total shares to be sold at 48-50m accounting for 20% of outstanding and 30% of float in Chiyoda’s upcoming removal from the Nikkei (and now confirmed – see Travis insight below) and Topix indexes, and referenced the exclusion trades resulted in Toshiba Corp (6502 JP) falling 24% and Sharp Corp (6753 JP) falling 31%. But Mio Kato, CFA feels that the company’s situation could skew the timing compared to what would be “normal”.

  • Mio believes that it may be more interesting to look for a reversion trade in the event that the stock price declines significantly into the exclusion. He feels that the fall may not be quite as steep as that for Toshiba or Sharp. In both Toshiba and Sharp’s cases there was still significant uncertainty surrounding the names as Toshiba had not completed or even announced its capital raise at the time and the sale of its memory subsidiary was still being hotly contested; while in Sharp’s case Hon Hai was playing hardball on deal terms.
  • In contrast, Chiyoda has already secured funding from a very stable and large partner and appears to have kitchen-sinked a lot of assumptions and faces a very bright operational outlook – its problems stem from poor risk management, which Mitsubishi is meant to solve, and not operations. 
  • In addition, due to Chiyoda’s previous operational struggles and write-downs there is already a very significant short base. This could distort the usual timing of the fall in the stock price and the fact that the stock has recovered to just 3.5% below the level prior to more widespread reporting of the exclusion points to this eventuality. It does seem likely that the size of the required sell could push Chiyoda’s price down at some point – Mio argues this could happen much closer to the actual event than usual. If borrow is difficult to come by, there could be money to be made on the other side around the turn of the month.

(link to Mio’s insight: Chiyoda: Risks to the Index Kick-Out Trade and Potential Volatility at Earnings the Next Day)


Bandai Namco Holdings (7832 JP)  (Mkt Cap: $12.6bn; Liquidity: $28mn)

The Nikkei Inc announced its “Changes to the Nikkei Indices” this week  which became inevitable when the Tokyo Stock Exchange announced on the 28th of June that Chiyoda Corp (6366 JP)s yuho (Annual Securities Report) had the company at a negative net worth, requiring a reassignment to the Second Section of the TSE. Nikkei 225 Methodology requires that members be TSE-1 listed. The Announcement surprised people. As expected, Chiyoda is Out – but Bandai is In.  Chiyoda closed down 2.6% on 2mm shares, and Bandai closed limit up +19.3% on 300k shares allocated at the limit on the close.

  • There are still something like 50 million shares of Chiyoda to sell. The significant shorts – which are likely well in excess of the 23+ million shares shown and reported – are likely sourcing a lot of their borrow from the shareholders (passive funds) who have to sell. Those shareholders will have to recall their borrow. Earnings come out the day after the exclusion. I would not want to be short that earnings number. Plus read Mio’s insight above.
  • There should be 27mm shares to buy in Bandai which is about 20% of float. However, if only half the foreigners and only half the individual holders would be willing to sell on a large jump in price in the next few weeks, then the net available to sell is probably closer to 80mm shares and 27mm to buy would be one-third. It’s a lot. Once it gets purchased by Nikkei 225 funds, it won’t come out anytime soon. This stock is likely to get squeezed.
  • Dmg Mori Co Ltd (6141 JP) was flagged by many as a good bet to replace Chiyoda. Since then, roughly 14 million shares of excess volume have traded. If half of that is a real displacement of holdings based on this event, 7mm shares would need to be sold. That is 3% of shares out and 4-5% of float. It is among the larger excess positioning situations in the last five years in the stock. DMG closed -10% on 7.3mm shares in response to the index changes.

(link to Travis’s insight: Nikkei 225 – Bandai Namco IN, Chiyoda OUT)


Kcc Corp (002380 KS)  (Mkt Cap: $2.2bn; Liquidity: $6mn)

KCC will split itself into two companies in the form of an equity spinoff with KCC the surviving company and KCG the new company. KCC will mainly comprise the B2B business (silicone, paint and varnish); KCG will get the B2C business such as glass and interior. An EGM will be held on Nov 13 and shareholder approval can be obtained with 2/3 of attending votes and 1/3 of shares out. Both companies will be listed – KCC on Jan 21 next year, but KCG’s listing date hasn’t been fixed.

  • Typically, demergers serve to streamline a business.  However, the major shareholder retains 40%, which Sanghyun Park considers to be weak. He believes the major shareholder intends to further solidify this controlling stake via a tender, possibly a month after the Jan 21 listing. 

(link to Sanghyun’s insight: KCC Corp Equity Spinoff: Summary & Mispricing Checkup)


R* Shares CPSE ETF (CPSEBE IN) 

The ETF is based on the Nifty CPSE index and currently includes 11 listed Central Public Sector Enterprises, declining to 10 after Rural Electrification (RECL IN) was kicked out this past Friday. The sixth tranche of the ETF is expected to open on July 18 to anchor investors and on July 19 to non-anchor investors. The new units are expected to start trading on July 29. The discount on the ETF will be 3%, opening up arbitrage opportunities to investors.

  • The CPSE ETF does not trade big volumes on a regular day. However, there is a huge volume surge following fund offerings as many investors look to flip their allocation back into the market and lock in a profit. The anchor portion was oversubscribed almost 6 times in the last tranche issued in March this year, though the number may be smaller this time with the tighter discount being offered.
  • The ETF will need to buy around 63m shares of Indian Oil Corp (IOCL IN) in the market on July 19. Brian Freitas estimates this number since the Government of India can only sell around 64m shares to the ETF as this will take their stake in the company down to 51.5%, the lowest percentage for the stock to remain in the Nifty CPSE index. Given the stock trades around 13m shares a day on average, he sees 4x of excess volume and expect the stock to rally in the lead up to July 19 and see buying over the day on July 19.

links to Brian’s insights:
The CPSE ETF Arb Is Back, but Tighter!
India – NIFTY CPSE Index Review.

M&A – ASIA-PAC

Unizo Holdings (3258 JP) (Mkt Cap: $913mn; Liquidity: $4mn)

Japan’s premier discount travel agency H I S Co Ltd (9603 JP) on Wednesday announced it would launch a Partial Tender Offer (commencing this past Friday) to purchase a 40+% stake in real estate and hotel business Unizo to raise its stake from ~4.8% to 45.0%. The Tender Offer price is at a 56% premium to the last trade and is at an 18-month high. But, this is a hostile tender.

  • A hostile tender offer by one company upon another conducted without warning, or with warning but without approval, is reasonably rare. In Japan, it is even rarer. This is, however, the second in six months – the first being Itochu Corp (8001 JP)‘s tender offer for shares of Descente Ltd (8114 JP).  HIS has decided to buy 40% of a company it hadn’t talked to. At a 50+% premium. And given this one has hostility AND a longer end date, there is more trading and event optionality than normal.
  • Unizo has several possible responses it could give. The right thing to do would be to establish an independent committee immediately. A rights offering might kill the deal. But it would be fair to investors. A White Knight is not unthinkable. Travis expects the odds are pretty good that Unizo does not have a great defense here. That means the Tender likely goes through.
  • Unless corporate and financial cross-holders tender, the pro-ration could end up being very high.  If crossholders tender, pro-ration goes way down and one is better off just selling everything in the market for a small loss. Travis is bullish that the tender goes through and bullish the profit opportunity. He thinks for the astute arbitrageur, there is a lot of room to play around the ranges here.

(link to Travis’s insight: HIS Hostile Tender for Unizo – Fun Ahead!)


Villa World Ltd (VLW AU)  (Mkt Cap: $203mn; Liquidity: $1mn)

VLW and AVID have (finally) entered into a Scheme Implementation Agreement at A$2.345/share yesterday, which is a 17.8% premium to the unaffected price of $1.99 on 14 March, and an A$0.115 bump over the initial pitch in March. Any final or special dividend paid on or prior to the implementation of the Scheme will reduce the Offer Price. The key nagging issue is Ho Bee Land Ltd (HOBEE SP).

  • Ho Bee, VLW’s largest shareholder and JV partner, responded to AVID’s proposal by buying 2.2mn shares (~1.8% of shares out) at an average of A$2.04/share – and a high of A$2.18/share – lifting its stake to 9.41% on the same day as the initial Offer. Ho Bee further bumped its stake to 10.45% on the 25 March at an average price of A$2.21; and finally, to 11.62% on the 15 April at an average of $2.17. Its overall average in-price is A$1.98/share.
  • Would Ho Bee go to such extreme just to extract another 5% from the Offer? Maybe, but it is a little weird. Ho Bee did not buy over $2.23/share.
  • On balance, this deal should get up. Pricing appears fair with respect to peers. Ho Bee receives a decent premium to its overall average position. This is also not a material holding for Ho Bee – the 11.62% stake is equivalent to ~2% of its market cap – while it remains directly invested in the Melbourne JV.  With a late November/ early December completion, this is trading very tight to terms at 0.6% gross.

(link to my insight: Villa World Greenlights AVID’s Offer)


Ascendas Hospitality Trust (ASCHT SP) (Mkt Cap: $844mn; Liquidity: $3mn)

On 3 July, Ascott Residence Trust (ART SP) and ASCHT jointly announced a proposed combination, which would result in the combined entity becoming the largest hospitality trust in the Asia Pacific region, one of the top ten globally, with an asset value of S$7.6bn. It would – using data from the end of June – become the 7th largest trust on the SGX.

  • The deal is for Ascott to acquire ASCHT through a Scheme of Arrangement whereby ASCHT unitholders will receive what was – at the announcement – S$1.0868 per ASCHT Stapled Unit. The exact terms are S$0.0543 in cash and 0.7942 Ascott Reit-BT Stapled Units. That is a ratio of 0.836 but if you do the arithmetic, it comes out as a NAV-flat transaction. Neither ASCHT nor ART shareholders “overly benefit” at the expense of the other, but they both benefit from scale lowering future costs.
  • The deal is another REIT consolidation to create a LARGER NewREIT. It was also totally obvious, after the Ascendas-Singbridge deal was signed earlier this year, that within the Capitaland group (which meant Temasek was going to own 51% of Capitaland when completed), this was going to happen (even though the deal meant there were no chained transactions for the REITs). It makes one wonder if there is a deal for Ascendas Real Estate Investment Trust (AREIT SP) to come. 
  • The deal (at the time of the insight) showed a 4.5% spread being long ASCHT and short Ascott, which is slightly wide for a deal of ~five months. However, there is some uncertainty in the distributions. If you own Ascott and are in a position to switch out of Ascott into AREIT, Travis would do so. If you own ASCHT and you like the risk of owning the REIT, you own the right one. 

(link to Travis’s insight: Ascott & Ascendas Hospitality Merger – Not Unexpected and Should Be Easy)


Dalian Port (Pda) Co Ltd H (2880 HK)  (Mkt Cap: $3bn; Liquidity: $1mn)

Back on the 4 June, Dalian Port (Pda) announced a possible Mandatory General Offer (MGO) at $1.0127/share, a 0.27% premium to last close. The MGO would be triggered following the rearrangement of various companies under the PRC government, collectively holding 68.37% into Dalian Port (Pda), with the long-term objective of merging the ports in Liaoning province under a single platform. The shareholding structure is a spider’s web and understanding the share transfers is probably best done by studying the diagrams in the document and the insight.

  • The integration/consolidation process is complicated with local, provincial and central government holdings in port ownership. Further, local governments, which often trumpet their success in tandem with the performance of its port, may be less willing to forego such economic benefits by giving up absolute control.
  • China Merchant Holdings already has effective control of Dalian Port (Pda) – (47.31%) direct and 21.05% via Team Able/China Merchants Port (144 HK). The equity transfers forming part of the restructuring are being hived out from one SASAC entity into another SASAC-controlled entity. This should all go through and the unconditional MGO will be triggered, and potentially wrap up in October, provided the ETA completes on the long stop date.
  • Dalian Port (Pda) is trading in line with listed Hong Kong ports. You have a (likely) hard floor at $1.01, with expectations of further group restructuring, as the three Liaoning ports are integrated. However, HK port companies are down ~7.% in the past year, similar to Chinese-listed port companies.  The sentiment is decidedly downbeat as the trade war creates a less profitable business environment.

(link to my insight: Dalian Port – Rearranging The Deck Chairs)


Health Management Intl (HMI SP) (Mkt Cap: $844mn; Liquidity: $3mn)

The previous Friday, listed regional (Singapore, Malaysia, Indonesia) private healthcare provider HMI announced an Implementation Agreement for a privatisation by way of Scheme of Arrangement whereby private equity fund EQT would acquire HMI for S$0.73/share in cash or one share of the Acquirer. That price is a 25-30% premium to the 1, 3, 6, and 12-month VWAPs prior to the announcement and a 14% premium to the last “undisturbed” trading day.

  • It is not overly generous. The premium is small, and the forecast Next 12 Month EV/EBITDA multiple at 17+x is OK but compared to the other private hospital operators out there in Asia it is not overwhelmingly high-priced. It seems a bit of a stretch to see someone come over the top when this has been negotiated. However, if one asked me whether the likelihood of bump or deal failure is more likely, Travis would tilt towards bump, but it would be just a kiss.
  • It takes 75% of the 39% not owned by NSI and “concert parties” to get this done, but the 2018 Annual Report showed that 89.75% of the shareholders (i.e. 83.2% or so of the possible Scheme Shareholders) owned more than 1,000,000 shares. The top 40 shareholders determine the outcome of this deal as long as the rest generally are split 51/49 or better. It is difficult to see this one getting knocked down.
  • Travis expects the timeline of this deal is about 4 months plus perhaps a week. That means at S$0.72 the gross spread at 1.39% gets you an annualised spread of about 4.15%. At S$0.715, the gross spread is 2.10% (before comms, etc) so 4 months is 6+% annualised.  The trade here is to get queue priority at S$0.715. 

(link to Travis’s insight: Health Management Int’l Privatisation – Easy Peasy)


Briefly …

Harbin Electric Co Ltd H (1133 HK) this week announced there will be no further extension of its Offer which closes on the 19 July. By my estimate, tendered shares total 71.86%. The tendering condition is 90%.

M&A – UK

Telford Homes (TEF LN) (Mkt Cap: $335mn; Liquidity: $1mn)

On July 3rd, US-based commercial real estate services company, CBRE Group Inc A (CBG US)announced that they had reached an agreement with the board of London-based residential real estate developer, Telford, to acquire 100% of its shares by way of a Scheme of Arrangement at a price of GBP3.50/ share. The offer values the target at a market cap of GBP 265mn. 

  • While the Offer Price translates to premia of 11.1%, 14.3%, and 21.3% to the undisturbed price, 1-month VWAP and 3-month VWAP respectively, it remains 3.4% lower than the 1-year VWAP of Telford shares. Furthermore, the offer price also translates to discounts of 28.8% and 38.8% to the stock’s 1-year and 2-year highs respectively.
  • The company appears to have confidence its current build-plan and will come through on budget and so after a couple of project delays at the end of this past year, earnings will rebound and march higher. The few analysts who cover the stock are less bullish this year, but it appears they expect the company to meet its 2020 targets a year or two later. 8x EPS and 1.0x book seem quite low. It is below the mean of the selected comps.
  •  If Travis had to bet right now, it’s 50/50 it does not get done. Brexit worries could get this over the line but he expects there are some unhappy shareholders. He is not sure there is enough time to get a competitor in there to see the price lifted.  The deal timeline is very short. The indicative timeline suggests the Target Scheme Meeting could be in just four weeks. 

(link to Travis’s insight: Telford Homes Takeout – A Disappointing End?)

M&A – US

Avon Products (AVP US) (Mkt Cap: $1.8bn; Liquidity: $41mn)

On May 22, 2019, Avon announced that it had entered into a merger agreement to be acquired in an all-stock transaction by Brazilian Holding Company Natura & Co (NATUR3 BZ).  Natura will exchange 0.30 of its shares for each AVP share on a fixed exchange ratio basis, currently valuing AVP at ~US$2 bn. The merger agreement deadline is set for July 22, 2020. On completion of the merger, NATU3 shareholders will own 76% of the combination with AVP shareholders owning 24%. The transaction catapults NATU3 to becoming the world’s sixth largest consumer goods company.

  • Natura is paying ~10x consensus 2019 EBITDA for standalone AVP which is reasonable in comparison to prevailing peer group multiples averaging 17x and compares with Natura’s own standalone valuation multiple of ~14x.
  • The transaction could attract particular scrutiny from the antitrust authorities in Brazil, which represents the single largest market for both Natura and AVP. According to data from Euromonitor, Natura maintains a commanding lead in Brazil’s direct sales market for cosmetics with an estimated 31% market share followed by a ~ 16% share for AVP. That being said, the direct sales market is based around independent consultants/reps, many of whom already offer both Natura and Avon products in Brazil. 
  • The double-digits merger spread that prevails (14% at the time of the insight) could offer a lucrative opportunity for arbs. The complicating factor is that Natura is listed on the Brazilian Stock exchange (B3) and denominated in an historically volatile currency, the Brazilian Real, while AVP shares trade on the NYSE in US$. As some AVP shareholders may not want to own or are restricted from owning shares that trade on a non-US exchange, Natura will offer AVP shareholders the option to receive Natura shares in the form of Level-II ADRs to be traded on the NYSE or shares listed on B3. Natura does not currently have an ADR in issue.

(link to Robert Sassoon‘s insight: MergerTalk: Natura & Co/Avon Products -“Ding Dong, The Avon Spread Calling”)

STUBBS/HOLDCOS

Singapore Airlines (SIA SP) / Sia Engineering (SIE SP) 

SIE gained 15% the previous week, rekindling privatisation talks by SIA.  Despite the share price increase, SIE trades around November 2009 levels. SIE is not aware of any reasons for the jump. The stub is not terribly exciting with SIE accounting for 18% and 22% of NAV and market cap, and barely makes the grade with SIE trading ~US$1mn/day.

  • Last year’s privatisation of HAECO (44 HK) at $72/share (63.2% premium to last close) by Swire Pacific Ltd Cl A (19 HK) – which held 74.9% prior to the Offer – is not lost on investors. The takeover PER was 35x vs. 19x currently for SIE. Peer comps trade at 24x. SIE only appears fairly valued on an EV/EBITDA metric on account of the earnings from associated companies and JVs.
  • SIE is a maintenance, repair & overhaul company providing aircraft & component overhaul, fleet management and line maintenance services. The company also has material stakes in associated companies and JVs which contribute 71% of the Group’s profits in FY19, up from 58% in FY18.
  • The outcome, should an Offer be pitched, would cost SIA ~S$700mn to take out the shares it does not own. Not chump change, and it might have a slightly negative impact on SIA as it removes one layer of transparency. But given the stub weakness, the focus would be on the SIE arbitrage. I would not want to be short SIE here.

(link to my insight: StubWorld: Just Rumours (For Now) As SIA Engineering Pops)

SHARE CLASSIFICATIONS

My share class monitor provides a snapshot of the premium/discounts for 322 share classifications –  ADRs, Korean prefs, dual class, Thai (F/L) & A/Hs – around the region.

(link to my insight: Share Classifications: A Year In Review)

OTHER M&A UPDATES

CCASS

My ongoing series flags large moves (~10%) in CCASS holdings over the past week or so, moves which are often outside normal market transactions.  These may be indicative of share pledges – like Madison Holdings Group Ltd (8057 HK) on the 5 July.  Or potential takeovers. Or simply help understand volume swings. 

Often these moves can easily be explained – the placement of new shares, rights issue, movements subsequent to a takeover, amongst others. For those mentioned below, I could not find an obvious reason for the CCASS move.   

Name

% chg

Into

Out of

ISP Global (8487 HK)
50.50%
Bluemont
Outside CCASS
Camsing (2662 HK)
Great Roc
Founder
18.20%
Kingston
Citi
Source: HKEx

2. Yaskawa: Poor 1Q Should Correct Expectations and Share Price But Start Searching for an Entry Point

Motion%20control%20scatter%20plot

Yaskawa Electric (6506 JP) reported 1Q earnings today, kicking off the season for the factory automation space in rather dour fashion with revenue down 16.2% YoY and OP down 58.2% YoY. Revenue was ¥107.4bn, 10% below consensus and we estimate about 4-5% below the company’s own plan, while OP was ¥7.2bn, about 30% below consensus.

The results look rather dire and are likely to pour cold water on hopes for a quick rebound for the sector. We are turning more constructive on the name but are increasingly concerned for peer Harmonic Drive Systems (6324 JP). We discuss the details below.

3. HIS Hostile Tender for Unizo – Fun Ahead!

Screenshot%202019 07 12%20at%2012.53.56%20am

Another Hostile Deal!!!

Japan’s premier discount travel agency H I S Co Ltd (9603 JP) on Wednesday announced it would launch a Partial Tender Offer to purchase a 40+% stake in real estate and hotel business Unizo Holdings (3258 JP) to raise its stake from ~4.8% to 45.05%. The Tender Offer was launched this morning (EDINET disclosure only in Japanese). The Tender Offer price is at a 56% premium to the last trade and is at an 18-month high.

The announcement was made at around 1:30pm local time, and the shares jumped 20% to limit up ¥2390 in a five minute period, trading 700,000 shares, which was about three and a half days volume on average – before getting pegged at limit up (the shares went limit up yesterday too, closing at ¥2890 on close allocation volume of 220,000+ shares. 

source: tradingview.com

Quite late that evening, Unizo Holdings issued a release saying…

The new Takeover Rules enacted in December 2006 (with one amendment to the SEL made in 2005 in direct reaction to the loophole used by Livedoor to acquire large stakes of Nippon Broadcasting System off-market to reach a level above one-third) are enshrined in the Financial Instruments and Exchange Act/Law (normally called “FIE”, “FIEA”, or “FIEL”), with the most relevant portions commencing with Article 27-2. These “TOB Rules” outlawed stealth acquisition off-market to “suddenly acquire” a large stake without passing through the market mechanism or conducting a Tender Offer. The principle of this was a sense of “fairness” such that minority investors had an equal opportunity to sell to someone who sought to have control or influence, and that it could not simply be arranged through collusive behavior. 

That’s why HIS is conducting a Tender Offer.

The first rule which matters here for Unizo Holdings (3258 JP) is that the Board of the “Subject Company”, according to Article 27-10…

shall, pursuant to the provisions of a Cabinet Office Ordinance, submit a document which states its opinion on the Tender Offer and other matters specified by a Cabinet Office Ordinance (hereinafter referred to as the “Subject Company’s Position Statement”) to the Prime Minister within a period specified by a Cabinet Order from the date when the Public Notice for Commencing Tender Offer is made.

That period specified is 10 business days, so Unizo has until 25 July.

A Rare Hostile Tender Offer

A hostile tender offer by one company upon another conducted without warning, or with warning but without approval, is reasonably rare. In Japan it is even rarer. This is, however, the second in six months, the first being Itochu Corp (8001 JP)‘s tender offer for shares of Descente Ltd (8114 JP). That situation was much discussed on these pages by Michael Causton and myself, and eight insights spanning months on the situation are to be found here

The Descente Tender Offer was to get Itochu from 30% to 40% after Itochu, which had been in business with Descente for 50 years, and had held 25% for decades, was not consulted on a business tie up with Wacoal, negotiated in a hurry last year, designed to sideline Itochu’s influence.

That was a news story and a half for 10% of a company. This time HIS analyzed the company, liked what it saw, bought 4.8%, and says it asked to meet. Unizo wouldn’t. Repeatedly.

So HIS decided to buy 40% of a company it hadn’t talked to. At a 50+% premium.

This promises to be interesting. And given this one has hostility AND a longer end date, there is more trading and event optionality than normal. That optionality is discussed below, and as is normal, we have Arb Grids.

The shares have traded for 5 minutes in the market and one closing allocation, and have traded 2.7% of shares out in that space with the stock now up 45% since 1:30pm Weds. This morning the shares will open and we will see what happens.


This situation is going to have hair and we love those. 

This is a $400mm Tender Offer.

It is WELL worth your time to study it if you are an arbitrageur. 

If you are a long-only investor holding the stock, it is a complicated situation which may warrant a deeper look into things you do not normally delve. Do not hesitate to get in touch.


For other insights on Japanese M&A please check the list of Japan-related Event-Driven insights here. As a reference to Japan M&A rules and practices, please see the Quiddity Japan M&A Guide 2019.

4. Dalian Port – Rearranging The Deck Chairs

Chart

Back on the 4 June, Dalian Port (Pda) Co Ltd H (2880 HK) announced a possible Mandatory General Offer (MGO) at $1.0127/share, a 0.27% premium to last close. 

The MGO would be triggered following the rearrangement of various companies under the PRC government, collectively holding 68.37% into Dalian Port (Pda), with the long-term objective of merging the ports in Liaoning province under a single platform.

Dalian Port Corporation (PDA) currently holds 46.8% – via A and H shares – into Dalian Port (Pda). PDA, in turn, is a 100%-held subsidiary of Liaoning Port Group, which in turn is held as to 50.1% by the Liaoning Provincial Government (LPG) (through Liaoning SASAC) and 49.9% by China Merchants Liaoning (CML). 

This % holding into Liaoning Port Group was formulated in a restructuring last November.

LPG intends transferring (deemed the Equity Transfer, or ETA) 1.1% of its stake to CML, giving CML 51% (& effective control) of Liaoning Port Group. 

LPG will then transfer 36.34% and 2.66% of its equity interest in Liaoning Port Group to Dalian SASAC and Yingkou SASAC respectively for nil consideration. Perusing the shareholder charts helps crystalize the process.

The transfer is subject to a number of conditions, but presumably will be rubber-stamped. The long stop date for the conditions is 30 September. 

The new news is that the transfer agreement in respect of the Dalian SASAC equity transfer was executed on 17 June 2019  – it is not clear why Dalian Port (Pda) chose to make this announcement over three weeks after it was completed.

The ETA remains subject to a number of outstanding conditions.

From an arb perspective, there isn’t much skin in the game, but that is deliberate. The intention is to maintain Dalian Port (Pda)’s listing and therefore the low-ball Offer premium. But the development of this integrated port platform is interesting.

5. KCC Corp Equity Spinoff: Summary & Mispricing Checkup

3

This post has a summary of KCC Corp’s equity spinoff into two companies. This was announced today on July 11 after the market closed. In this post, I also look at mispricing possibilities resulting from this demerger. 

Get Straight to the Source on Smartkarma

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Brief Industrials: MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms
  2. Extreme Valuations: Global Stock Ideas Using the BORUC Yield
  3. Xinhua Winshare (811 HK): Secured 6.2% Yield Rock Solid in the Waves

1. MergerTalk: UnitedTech/Raytheon – It’s The UTX Share Price That Needs Adjusting, Not The Terms

Utx3

Reaction to the proposed ‘merger of equals’ between aerospace giant United Technologies (UTX US) and US defense  contractor Raytheon Company (RTN US) announced at the beginning iof the week, has so far been met with an underwhelming reaction by the market.  While the strategic rationale for the deal sounds reasonable to us (although we acknowledge that our viewpoint is not universally accepted). Nor do we have any qualms about the terms of the offer.  So what is the issue here?

We believe the major complicating factor in this situation is that United Technologies is a company in the process of  transitioning itself from being a multi-industrial conglomerate to one focused on Aerospace & Defense, which is not properly reflected in its share price. This has significant ramifications for an all-stock deal in which the substantially undervalued United Technologies stock is effectively the currency of choice for this merger. The mispricing of UTX stock (which we assess should be trading ~15%-40% higher than the prevailing price) serves to misrepresent the value of the offer to Raytheon shareholders and needs to be corrected. Below, we offer a detailed assessment of how we arrive at this conclusion.  

2. Extreme Valuations: Global Stock Ideas Using the BORUC Yield

The Bucephalus Idea Generator (BIG) picks stocks by combining our work on Creative Accounting and our work on capex and valuation cycles to see which companies are forecast to generate extreme returns and/or are on extreme valuations. The model then creates performance outcomes to search for absolute and relative investment ideas.

We run the model every month to see what has changed and which companies are worthy of further investigation.

Click here to download a sample company overview from the Bucephalus Idea Generator.

3. Xinhua Winshare (811 HK): Secured 6.2% Yield Rock Solid in the Waves

Earnings

Xinhua Winshare Publishing&Media (811 HK) provides a state of calm amid the current market volatility through its stable earnings stream from book publishing and distribution.  Supported by such earnings, the company has been paying annual DPS of Rmb0.30 consecutively for nine years since 2010. At 6.2% prospective dividend yield, XW’s share is currently attractively priced, in our view. Its publishing and distribution businesses are domestically focused, not affected by the US-China trade war and do not expose to the slowdown in China’s economy. While such businesses are not expected to generate significant capital gain in the near term, upside may come in the long term from positive demographic trend and the company’s strategic initiatives. 

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Industrials: Extreme Valuations: Global Stock Ideas Using the BORUC Yield and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Extreme Valuations: Global Stock Ideas Using the BORUC Yield
  2. Xinhua Winshare (811 HK): Secured 6.2% Yield Rock Solid in the Waves

1. Extreme Valuations: Global Stock Ideas Using the BORUC Yield

The Bucephalus Idea Generator (BIG) picks stocks by combining our work on Creative Accounting and our work on capex and valuation cycles to see which companies are forecast to generate extreme returns and/or are on extreme valuations. The model then creates performance outcomes to search for absolute and relative investment ideas.

We run the model every month to see what has changed and which companies are worthy of further investigation.

Click here to download a sample company overview from the Bucephalus Idea Generator.

2. Xinhua Winshare (811 HK): Secured 6.2% Yield Rock Solid in the Waves

Earnings

Xinhua Winshare Publishing&Media (811 HK) provides a state of calm amid the current market volatility through its stable earnings stream from book publishing and distribution.  Supported by such earnings, the company has been paying annual DPS of Rmb0.30 consecutively for nine years since 2010. At 6.2% prospective dividend yield, XW’s share is currently attractively priced, in our view. Its publishing and distribution businesses are domestically focused, not affected by the US-China trade war and do not expose to the slowdown in China’s economy. While such businesses are not expected to generate significant capital gain in the near term, upside may come in the long term from positive demographic trend and the company’s strategic initiatives. 

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Industrials: Extreme Valuations: Global Stock Ideas Using the BORUC Yield and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Extreme Valuations: Global Stock Ideas Using the BORUC Yield
  2. Xinhua Winshare (811 HK): Secured 6.2% Yield Rock Solid in the Waves
  3. Hitachi Ltd. (6501 JP): Share Price Up on Restructuring News

1. Extreme Valuations: Global Stock Ideas Using the BORUC Yield

The Bucephalus Idea Generator (BIG) picks stocks by combining our work on Creative Accounting and our work on capex and valuation cycles to see which companies are forecast to generate extreme returns and/or are on extreme valuations. The model then creates performance outcomes to search for absolute and relative investment ideas.

We run the model every month to see what has changed and which companies are worthy of further investigation.

Click here to download a sample company overview from the Bucephalus Idea Generator.

2. Xinhua Winshare (811 HK): Secured 6.2% Yield Rock Solid in the Waves

Earnings

Xinhua Winshare Publishing&Media (811 HK) provides a state of calm amid the current market volatility through its stable earnings stream from book publishing and distribution.  Supported by such earnings, the company has been paying annual DPS of Rmb0.30 consecutively for nine years since 2010. At 6.2% prospective dividend yield, XW’s share is currently attractively priced, in our view. Its publishing and distribution businesses are domestically focused, not affected by the US-China trade war and do not expose to the slowdown in China’s economy. While such businesses are not expected to generate significant capital gain in the near term, upside may come in the long term from positive demographic trend and the company’s strategic initiatives. 

3. Hitachi Ltd. (6501 JP): Share Price Up on Restructuring News

Screen%20shot%202019 06 12%20at%2016.11.45

Since June 7, when Japan’s Nikkei newspaper reported that Hitachi Ltd. (6501 JP) is thinking about making Hitachi High-Technologies (8036 JP) a wholly-owned subsidiary and then reorganizing its various businesses to fit its new strategic plan, the shares of Hitachi Ltd. have risen by 5%. Hitachi Ltd. currently owns 51.6% of Hitachi High-Technologies, which makes semiconductor production equipment, medical equipment, electron microscopes and other analytical instruments, and distributes industrial & IT systems and industrial materials & components.

Both companies issued press releases denying that they they had disclosed this information but, as noted by David Rubenstein in Hitachi’s Hidden Gem Out Of The Bag, “the Nikkei usually bases its speculation on factual sources.” A spin-off of Hitachi High-Technologies’ semiconductor equipment business would be consistent with the sale of Hitachi Kokusai’s semiconductor equipment business to KKR in 2017, while medical equipment, microscopes and other analytical instruments would probably fit with Hitachi Ltd.’s health care and other businesses. The distribution businesses could also be folded into the parent company’s existing operations.

As we noted in Hitachi Ltd. (6501 JP): New Mid-Term Plan, Hitachi High-Technologies and three other listed subsidiaries – Hitachi Construction Machinery (6305 JP – 50.2% owned), Hitachi Metals (5486 JP – 52.7% owned) and Hitachi Chemical (4217 JP – 51.2% owned) – are now classified as independent segments in the parent company’s consolidated accounts, suggesting that they are candidates for restructuring. In late April, the Japanese press reported that Hitachi Ltd. is planning to sell Hitachi Chemical.

At ¥4,000 (Wednesday, June 12, close), Hitachi Ltd. shares are now selling at 9x management’s EPS guidance for FY Mar-20, which compares with a 6-year P/E range of 6x – 24x. Assuming no major write-downs and a normal tax rate, the achievement of management’s mid-term targets could bring the P/E down to 7x. In our view, Hitachi’s restructuring efforts are not sufficiently appreciated and, from a long-term perspective, its shares are under-valued.

Get Straight to the Source on Smartkarma

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Brief Industrials: Yaskawa: Poor 1Q Should Correct Expectations and Share Price But Start Searching for an Entry Point and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Yaskawa: Poor 1Q Should Correct Expectations and Share Price But Start Searching for an Entry Point
  2. HIS Hostile Tender for Unizo – Fun Ahead!
  3. Dalian Port – Rearranging The Deck Chairs
  4. KCC Corp Equity Spinoff: Summary & Mispricing Checkup
  5. EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?

1. Yaskawa: Poor 1Q Should Correct Expectations and Share Price But Start Searching for an Entry Point

Motion%20control%20op

Yaskawa Electric (6506 JP) reported 1Q earnings today, kicking off the season for the factory automation space in rather dour fashion with revenue down 16.2% YoY and OP down 58.2% YoY. Revenue was ¥107.4bn, 10% below consensus and we estimate about 4-5% below the company’s own plan, while OP was ¥7.2bn, about 30% below consensus.

The results look rather dire and are likely to pour cold water on hopes for a quick rebound for the sector. We are turning more constructive on the name but are increasingly concerned for peer Harmonic Drive Systems (6324 JP). We discuss the details below.

2. HIS Hostile Tender for Unizo – Fun Ahead!

Screenshot%202019 07 12%20at%203.01.48%20am

Another Hostile Deal!!!

Japan’s premier discount travel agency H I S Co Ltd (9603 JP) on Wednesday announced it would launch a Partial Tender Offer to purchase a 40+% stake in real estate and hotel business Unizo Holdings (3258 JP) to raise its stake from ~4.8% to 45.05%. The Tender Offer was launched this morning (EDINET disclosure only in Japanese). The Tender Offer price is at a 56% premium to the last trade and is at an 18-month high.

The announcement was made at around 1:30pm local time, and the shares jumped 20% to limit up ¥2390 in a five minute period, trading 700,000 shares, which was about three and a half days volume on average – before getting pegged at limit up (the shares went limit up yesterday too, closing at ¥2890 on close allocation volume of 220,000+ shares. 

source: tradingview.com

Quite late that evening, Unizo Holdings issued a release saying…

The new Takeover Rules enacted in December 2006 (with one amendment to the SEL made in 2005 in direct reaction to the loophole used by Livedoor to acquire large stakes of Nippon Broadcasting System off-market to reach a level above one-third) are enshrined in the Financial Instruments and Exchange Act/Law (normally called “FIE”, “FIEA”, or “FIEL”), with the most relevant portions commencing with Article 27-2. These “TOB Rules” outlawed stealth acquisition off-market to “suddenly acquire” a large stake without passing through the market mechanism or conducting a Tender Offer. The principle of this was a sense of “fairness” such that minority investors had an equal opportunity to sell to someone who sought to have control or influence, and that it could not simply be arranged through collusive behavior. 

That’s why HIS is conducting a Tender Offer.

The first rule which matters here for Unizo Holdings (3258 JP) is that the Board of the “Subject Company”, according to Article 27-10…

shall, pursuant to the provisions of a Cabinet Office Ordinance, submit a document which states its opinion on the Tender Offer and other matters specified by a Cabinet Office Ordinance (hereinafter referred to as the “Subject Company’s Position Statement”) to the Prime Minister within a period specified by a Cabinet Order from the date when the Public Notice for Commencing Tender Offer is made.

That period specified is 10 business days, so Unizo has until 25 July.

A Rare Hostile Tender Offer

A hostile tender offer by one company upon another conducted without warning, or with warning but without approval, is reasonably rare. In Japan it is even rarer. This is, however, the second in six months, the first being Itochu Corp (8001 JP)‘s tender offer for shares of Descente Ltd (8114 JP). That situation was much discussed on these pages by Michael Causton and myself, and eight insights spanning months on the situation are to be found here

The Descente Tender Offer was to get Itochu from 30% to 40% after Itochu, which had been in business with Descente for 50 years, and had held 25% for decades, was not consulted on a business tie up with Wacoal, negotiated in a hurry last year, designed to sideline Itochu’s influence.

That was a news story and a half for 10% of a company. This time HIS analyzed the company, liked what it saw, bought 4.8%, and says it asked to meet. Unizo wouldn’t. Repeatedly.

So HIS decided to buy 40% of a company it hadn’t talked to. At a 50+% premium.

This promises to be interesting. And given this one has hostility AND a longer end date, there is more trading and event optionality than normal. That optionality is discussed below, and as is normal, we have Arb Grids.

The shares have traded for 5 minutes in the market and one closing allocation, and have traded 2.7% of shares out in that space with the stock now up 45% since 1:30pm Weds. This morning the shares will open and we will see what happens.


This situation is going to have hair and we love those. 

This is a $400mm Tender Offer.

It is WELL worth your time to study it if you are an arbitrageur. 

If you are a long-only investor holding the stock, it is a complicated situation which may warrant a deeper look into things you do not normally delve. Do not hesitate to get in touch.


For other insights on Japanese M&A please check the list of Japan-related Event-Driven insights here. As a reference to Japan M&A rules and practices, please see the Quiddity Japan M&A Guide 2019.

3. Dalian Port – Rearranging The Deck Chairs

After%201.1%25

Back on the 4 June, Dalian Port (Pda) Co Ltd H (2880 HK) announced a possible Mandatory General Offer (MGO) at $1.0127/share, a 0.27% premium to last close. 

The MGO would be triggered following the rearrangement of various companies under the PRC government, collectively holding 68.37% into Dalian Port (Pda), with the long-term objective of merging the ports in Liaoning province under a single platform.

Dalian Port Corporation (PDA) currently holds 46.8% – via A and H shares – into Dalian Port (Pda). PDA, in turn, is a 100%-held subsidiary of Liaoning Port Group, which in turn is held as to 50.1% by the Liaoning Provincial Government (LPG) (through Liaoning SASAC) and 49.9% by China Merchants Liaoning (CML). 

This % holding into Liaoning Port Group was formulated in a restructuring last November.

LPG intends transferring (deemed the Equity Transfer, or ETA) 1.1% of its stake to CML, giving CML 51% (& effective control) of Liaoning Port Group. 

LPG will then transfer 36.34% and 2.66% of its equity interest in Liaoning Port Group to Dalian SASAC and Yingkou SASAC respectively for nil consideration. Perusing the shareholder charts helps crystalize the process.

The transfer is subject to a number of conditions, but presumably will be rubber-stamped. The long stop date for the conditions is 30 September. 

The new news is that the transfer agreement in respect of the Dalian SASAC equity transfer was executed on 17 June 2019  – it is not clear why Dalian Port (Pda) chose to make this announcement over three weeks after it was completed.

The ETA remains subject to a number of outstanding conditions.

From an arb perspective, there isn’t much skin in the game, but that is deliberate. The intention is to maintain Dalian Port (Pda)’s listing and therefore the low-ball Offer premium. But the development of this integrated port platform is interesting.

4. KCC Corp Equity Spinoff: Summary & Mispricing Checkup

2

This post has a summary of KCC Corp’s equity spinoff into two companies. This was announced today on July 11 after the market closed. In this post, I also look at mispricing possibilities resulting from this demerger. 

5. EGM Alliance Mineral (AMS SP): Galaxy Investment Approved by Shareholders. Next Stop: Full Takeover?

Slide%20on%20nev%20lithium%20market%20july%202019

Alliance Mineral Assets (AMS SP) hosted an EGM to ask its shareholders for approval to issue shares to competitor Galaxy Resources (GXY AU). See details in my previous insight Alliance Mineral (AMS SP): Galaxy Resources Now Largest Shareholder, Tick Tock Until Full Takeover?

The capital injection was approved by a majority of AMS’ investors and will make GXY the largest investor in AMS. AMS will also change its name to Alita Resources.

GXY paid 0.20 AUD/share which gives them an 11.81% stake in the company. Recently, AMS’ share price has been under continued selling pressure falling to 0.134 SGD, which equates to a market valuation of only 200M SGD. While sentiment among the lithium names is negative (for the bearish case read Lithium Market – Phlegmatic Growth, Terrible Investment! by Gaius King ) we note that Alliance has guaranteed offtake agreements for 50% of its production, has the highest quality spodumene available in the market and its contractual selling price is significantly higher ($700+) than its costs ($500-550). 

GXY is now ‘half-pregnant‘ and given the company’s low reserve life (less than 5 years) and AMS’ ongoing exploration program we predict it is only a matter of time before a full takeover of AMS is considered by GXY management. In this respect, we note that GXY’s new CEO, Simon Hay, just started his role on 01/07/19 and will surely need to consider GXY diminished market valuation and short mine life.

Should GXY fail to act we shouldn’t discount the possibility that larger players such as Wesfarmers Ltd (WES AU) could be looking to consolidate the space after its recent purchase of Kidman Resources (KDR AU)

Fair Value is reduced to 0.30 SGD (was 0.35 SGD before dilution effect).

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Brief Industrials: Xinhua Winshare (811 HK): Secured 6.2% Yield Rock Solid in the Waves and more

By | Daily Briefs, Industrials Sector

In this briefing:

  1. Xinhua Winshare (811 HK): Secured 6.2% Yield Rock Solid in the Waves
  2. Hitachi Ltd. (6501 JP): Share Price Up on Restructuring News
  3. Korea M&A Spotlight: LG Corp Plans to Sell 35% Stake of LG CNS for About 1 Trillion Won

1. Xinhua Winshare (811 HK): Secured 6.2% Yield Rock Solid in the Waves

Earnings

Xinhua Winshare Publishing&Media (811 HK) provides a state of calm amid the current market volatility through its stable earnings stream from book publishing and distribution.  Supported by such earnings, the company has been paying annual DPS of Rmb0.30 consecutively for nine years since 2010. At 6.2% prospective dividend yield, XW’s share is currently attractively priced, in our view. Its publishing and distribution businesses are domestically focused, not affected by the US-China trade war and do not expose to the slowdown in China’s economy. While such businesses are not expected to generate significant capital gain in the near term, upside may come in the long term from positive demographic trend and the company’s strategic initiatives. 

2. Hitachi Ltd. (6501 JP): Share Price Up on Restructuring News

Screen%20shot%202019 06 12%20at%2016.11.45

Since June 7, when Japan’s Nikkei newspaper reported that Hitachi Ltd. (6501 JP) is thinking about making Hitachi High-Technologies (8036 JP) a wholly-owned subsidiary and then reorganizing its various businesses to fit its new strategic plan, the shares of Hitachi Ltd. have risen by 5%. Hitachi Ltd. currently owns 51.6% of Hitachi High-Technologies, which makes semiconductor production equipment, medical equipment, electron microscopes and other analytical instruments, and distributes industrial & IT systems and industrial materials & components.

Both companies issued press releases denying that they they had disclosed this information but, as noted by David Rubenstein in Hitachi’s Hidden Gem Out Of The Bag, “the Nikkei usually bases its speculation on factual sources.” A spin-off of Hitachi High-Technologies’ semiconductor equipment business would be consistent with the sale of Hitachi Kokusai’s semiconductor equipment business to KKR in 2017, while medical equipment, microscopes and other analytical instruments would probably fit with Hitachi Ltd.’s health care and other businesses. The distribution businesses could also be folded into the parent company’s existing operations.

As we noted in Hitachi Ltd. (6501 JP): New Mid-Term Plan, Hitachi High-Technologies and three other listed subsidiaries – Hitachi Construction Machinery (6305 JP – 50.2% owned), Hitachi Metals (5486 JP – 52.7% owned) and Hitachi Chemical (4217 JP – 51.2% owned) – are now classified as independent segments in the parent company’s consolidated accounts, suggesting that they are candidates for restructuring. In late April, the Japanese press reported that Hitachi Ltd. is planning to sell Hitachi Chemical.

At ¥4,000 (Wednesday, June 12, close), Hitachi Ltd. shares are now selling at 9x management’s EPS guidance for FY Mar-20, which compares with a 6-year P/E range of 6x – 24x. Assuming no major write-downs and a normal tax rate, the achievement of management’s mid-term targets could bring the P/E down to 7x. In our view, Hitachi’s restructuring efforts are not sufficiently appreciated and, from a long-term perspective, its shares are under-valued.

3. Korea M&A Spotlight: LG Corp Plans to Sell 35% Stake of LG CNS for About 1 Trillion Won

It was reported after the market close yesterday that LG Corp (003550 KS) plans to sell 35% or more stake of LG CNS for about 1 trillion won. LG CNS is the system integration IT service unit of the LG Group.

We believe that this announcement to sell about 35% stake of LG CNS will provide a further positive boost to LG Corp’s share price since it could increase the probability of paying out higher dividends.

LG CNS has relatively stable financials. It generated sales of 3.1 trillion won (up 3.8% YoY) and operating profit of 187.1 billion won (down 25.5% YoY) in 2018. The company’s operating margin averaged 6.1% during this period.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.